FINA 3313 Ch 5

41. Given a set future value, which of the following will contribute to a lower present value?

A. Higher discount rate

87. What is the relationship between an annually compounded rate and the annual percentage rate (APR) which is calculated for truth-in-lending laws for a loan requiring monthly payments?

A. The APR is lower than the annually compounded rate

102. What happens over time to the real cost of purchasing a home if the mortgage payments are fixed in nominal terms and inflation is in existence?

C. The real cost is decreasing.

96. An APR will be equal to an effective annual rate if:

C. compounding occurs annually.

95. Other things being equal, the more frequent the compounding period, the:

C. higher the effective annual interest rate.

19. Any sequence of equally spaced, level cash flows is called an annuity. An annuity is also known as a perpetuity.

FALSE

22. An effective annual rate must be greater than an annual percentage rate.

FALSE

23. An annual percentage rate (APR) is determined by annualizing the rate using compound interest.

FALSE

25. Nominal dollars refer to the amount of purchasing power.

FALSE

26. The appropriate manner of adjusting for inflationary effects is to discount nominal cash flows with real interest rates.

FALSE

3. The present value of an annuity due equals the present value of an ordinary annuity times the discount rate.

FALSE

5. A dollar tomorrow is worth more than a dollar today.

FALSE

7. For a given amount, the lower the discount rate, the less the present value.

FALSE

54. Which of the following factors is fixed and thus cannot change for a specific perpetuity?

B. Cash payment of a perpetuity

58. Which of the following will increase the present value of an annuity, other things equal?

B. Decreasing the interest rate

69. Which of the following characteristics applies to the amortization of a loan such as a home mortgage?

B. The amortization increases with each payment.

31. The concept of compound interest refers to:

B. payment of interest on previously earned interest.

100. Which of the following statements best describes the real interest rate?

C. Real interest rates can be negative, zero, or positive.

55 The present value of a perpetuity can be determined by:

D. Dividing the payment by the interest rate.

28. Under which of the following conditions will a future value calculated with simple interest exceed a future value calculated with compound interest at the same rate?

D. This is not possible with positive interest rates.

53. A stream of equal cash payments lasting forever is termed:

D. a perpetuity.

89. If interest is paid m times per year, then the per-period interest rate equals the:

D. annual percentage rate divided by m.

86. An interest rate that has been annualized using compound interest is termed the:

D. effective annual interest rate.

32. When an investment pays only simple interest, this means:

D. interest is earned only on the original investment

42. Cash flows occurring in different periods should not be compared unless:

D. the flows have been discounted to a common date.

65. An amortizing loan is one in which:

D. the principal balance is reduced with each payment.

14. An annuity factor represents the future value of $1 that is deposited today.

FALSE

16. Converting an annuity to an annuity due decreases the present value.

FALSE

17. The term "constant dollars" refers to equal payments for amortizing a loan.

FALSE

0. The discount factor is used to calculate the present value of $1 received in year t.

TRUE

1. Compound interest pays interest for each time period on the original investment plus the accumulated interest.

TRUE

11. You should never compare cash flows occurring at different times without first discounting them to a common date.

TRUE

12. The Excel function for present value is PV (rate, nper, pmt, FV).

TRUE

13. A perpetuity is a special form of an annuity.

TRUE

15. Accrued interest declines with each payment on an amortizing loan.

TRUE

18. An annuity due must have a present value at least as large as an equivalent ordinary annuity.

TRUE

2. When money is invested at compound interest, the growth rate is the interest rate.

TRUE

20. A mortgage loan is an example of an amortizing loan. "Amortizing" means that part of the monthly payment is used to pay interest on the loan and part is used to reduce the amount of the loan.

TRUE

21. The Excel function for interest rate is RATE (nper, pmt, PV, FV).

TRUE

24. In 2002, the U.S. inflation rate was below 2% and a few countries were even experiencing deflation.

TRUE

4. The more frequent the compounding, the higher the future value, other things equal.

TRUE

6. The Excel function for future value is FV (rate, nper, pmt, PV).

TRUE

8. Comparing the values of undiscounted cash flows is analogous to comparing apples to oranges.

TRUE

9. To calculate present value, we discount the future value by some interest rate r, the discount rate.

TRUE